Your Right to Know

WASHINGTON — Millions of families and businesses will get hit by big tax increases a lot sooner
than many realize if Congress and the White House don’t agree on a plan to skirt the year-end “
fiscal cliff” of higher tax rates and big government spending cuts.

In fact, they already have.

More than 70 tax breaks enjoyed by individuals and businesses expired at the end of 2011. If
Congress doesn’t extend them retroactively to the beginning of this year, a typical middle-class
family could face a $4,000 tax increase when filing a 2012 return in the spring, according to an
analysis by H&R Block, the tax-preparing giant.

At the same time, businesses could lose dozens of tax breaks they have enjoyed for years,
including generous credits for investing in research and development, write-offs for restaurants
and retail stores that expand or upgrade, and tax breaks for financial companies with subsidiaries
abroad.

Even if Congress does act, last-minute changes to federal tax laws could make it difficult for
taxpayers to figure out their 2012 tax bills.

“We’re really expecting this upcoming tax season to be one of the more-challenging ones on
record,” said Kathy Pickering, executive director of the Tax Institute at H&R Block. “For your
2012 returns, there’s so much confusion about what will be impacted.”

Automatic tax increases are scheduled to take effect next year, when tax cuts first enacted
under President George W. Bush, and extended under President Barack Obama, expire. A temporary
reduction in the Social Security payroll tax is set to vanish as well.

Obama wants to let the Bush-era tax cuts expire on incomes higher than $200,000 for individuals
and $250,000 for married couples, while extending the tax cuts for people making less.

House Speaker John Boehner and other Republicans have said they are open to more tax revenue
through reducing or eliminating unspecified tax breaks. But Boehner, R-West Chester, moved toward
the president’s position late last week, proposing raising top rates for people earning more than
$1 million in exchange for deeper spending cuts, particularly in health care and other mandatory
spending programs.

Obama has not accepted that offer, according to people familiar with the talks, but Boehner’s
offer suggests that the negotiations are being renewed after appearing stalled just days ago.

Lost in the debate is a big package of tax breaks that already expired for 2012. Lawmakers in
both parties say they expect those tax cuts to be addressed in any deal to avoid the fiscal cliff.
But they don’t want to deal with them separately because that would reduce pressure to reach a
broader budget agreement.

The biggest tax increase looming for individuals for this year is the alternative minimum tax.
The AMT was first enacted in 1969 to ensure that wealthy people can’t use tax breaks to escape
paying any federal taxes. The tax was never adjusted for inflation, however, so Congress routinely
does that to prevent hefty tax increases on millions of middle-income families.

Congress last adjusted the AMT in 2010, and about 4 million taxpayers paid it in 2011. Without a
new adjustment for the 2012 tax year, the AMT would reach an additional 28 million taxpayers,
increasing their tax bill by an average of $3,700.

The tax would affect individuals making more than $33,750 and married couples making more than
$45,000, according to the Internal Revenue Service.

Other expired tax breaks include deductions for college expenses, deductions for state and local
sales taxes and a $250 deduction for teachers who buy classroom supplies with their own money. The
sales-tax deduction is geared toward taxpayers in states without state income taxes: Alaska,
Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.

The tax increases could vary greatly, depending on people’s income and which deductions they
qualify for. For example, a single man making $65,000 who paid $6,000 in college tuition and fees
would face a tax increase of $837, mainly because he would lose a deduction for college expenses,
according to the H&R Block analysis.

A married couple with two young children and a $100,000 income could face a tax increase of more
than $6,600 if they live in a state that doesn’t have a state income tax. Most of that increase —
$4,015 — would come from the AMT. The AMT also would reduce their tax credits, and they would lose
a deduction for paying state and local sales taxes.

The AMT is expensive to fix. A two-year adjustment passed by the Senate Finance Committee last
summer would save middle-income taxpayers a total of $132 billion in 2012 and 2013, according to
the Joint Committee on Taxation, the official scorekeeper for Congress. That bill addressed many of
the tax breaks that expired for 2012, and the committee passed it with bipartisan support. However,
the full Senate never considered it.

The AMT adjustment also includes a rule that affects the way tax credits are calculated for
millions of taxpayers even if they don’t have to pay the AMT, the IRS said. These taxpayers might
not face a tax increase, but there could be delays in processing their returns.

Congress always has adjusted the AMT, and the IRS is preparing as if it will do so again, acting
IRS Commissioner Steven T. Miller recently told Congress.

If lawmakers don’t address the AMT, about 60 million taxpayers, nearly half of all individual
filers, would have to wait at least until late March to file their returns while the IRS reworks
its systems, Miller said.